Growing pains can be fatal

Too many well-established businesses can become fatally unhealthy because owners impulsively decide to grow them. Having survived the first three years after start-up, when one in three businesses fail, an owner will launch an expansion program on the basis of perceived market opportunities without a proper understanding of its complexities.

There are three fundamental causes of catastrophic business growth.

  • A rule of thumb is that if a business’s turnover is growing by $1m annually and it’s making $600,000 profit, then it needs to have on hand another $400,000 to fund growth and as a buffer against unforeseen circumstances.
  • Businesses attempt to grow when fundamentally they’re not profitable. Lack of cash is one manifestation of an unprofitable business.
  • Businesses are put in growth mode with insufficient working capital to pay for long-term assets like new plant. Trouble ensues when owners lose sight of what’s happening with profitability and cash flow.

Business owners contemplating a growth program must have an understanding of working capital absorption ration. This enables an owner to know how much working capital they require to increase sales by a specific number.

Business owners can blame virtually any factor or number of factors causing pain in their processes of growth, but it is at least one of the above three disruptions that may well kill the business.

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Unpaid Business Taxes: How to Settle Your Debt and Avoid Bankruptcy

If your business is in danger of facing bankruptcy, there may still be a way to avoid it. The ramifications for a business bankruptcy is pretty dire and can affect not only your business but other companies who are involved with you in hopes of improving their own efforts toward success. By declaring bankruptcy, you are opting out of paying your debts to these companies that are expecting money from you. This, in turn, affects their business’ bottom-line revenue, because now they’re taking a loss.

Bankruptcy. Not Cool. Not Cool at All!

Imagine if you loaned a friend $100 who promised to pay you back. That’s $100 that you’re expecting to put back in your bank account. You may have already spent that those funds trusting that your friend is going to make good on his or her promise—especially if there was a signed agreement that he or she signed. Then next month, they file for bankruptcy! What does that mean for you? It means that you’re out of $100 and if you jumped ahead and spent that promised money, then that snowballs into another debt that won’t get paid, or money taken out another stream of revenue to supplement the loss.

Either way, it doesn’t look good for you.

When you file for bankruptcy, you’ll suddenly understand the origin of the term, “You’ll never do business in this town again!” because no one will want to conduct business with someone who can’t successfully manage a business.

Bankruptcy is Avoidable!

One way you can settle your business debts is to negotiate with each of your debtors to accept a reduced payment to settle the loan. Many businesses will gladly accept that than nothing at all once they learn that you’re going out of business. In fact, they will appreciate your efforts of coming to them first trying to work something out rather than leaving them high and dry.

This may sound pretty simple, but before you start making negotiations, you’ll first need to prioritize your debts. There’s still payroll and payroll taxes that need to be met as well as other business expenses like rent/mortgage and utilities. Make a list of all the most pressing debts that your business has and address them accordingly.

Still, Need Help?

Even with prioritizing your debts, deciding which businesses get paid and which ones don't can still be a painful process. Another way to settle your debt and avoid bankruptcy is to let the tax experts handle everything.

Success Tax Relief has over 30 years of experience getting people out of tax debt, whether it’s personal or business-related. We specialize in audits, Offer in Compromise, tax preparation, installment agreements, personal credit counseling and helping you re-establish your business credit. Read all of the services we have to offer here.

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Corporate tax is defined as “an assessment levied by a government on the profits of a company. The rate of corporate income tax paid by a business varies between countries, although since corporations are legal entities distinct from their owners and operators, they are typically taxed as if they were people.”

Generally, the tax code favors some activities and investments over others, and creates opportunities for certain firms that others can’t use. Amazon, given its widely known success, is widely known as the model corporate income taxpayer. Some say it is absent from the ranks of top taxpayers of Corporate America’s giants.

writes that Amazon’s 93.3 percent effective rate appears to substantial, “given that the statutory top income rate for partnerships in the U.S. is 35 percent (39.1 percent when you factor in state wage charges).” Their corporate rate of 93.3 is the most noteworthy of any G-20 nation, as indicated by the Congressional Budget Office.

Amazon’s corporate salary assessment charges are small, however, in light of the fact that its corporate pay is small. Wal-Mart, for example, has a pre tax wage that has totaled $209 billion since 2008, while Amazon remains at a relatively underwhelming number at under $11 billion.

Organizations face high tax rates because they have trouble shifting operations into a lower tax bracket. Then again, organizations that face high assessment rates have a tendency to have U.S.-concentrated organizations and a higher dependency on the tangible.

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New State Use Tax Reporting Requirements

More Use Tax Compliance Requirements, More Headaches on the Horizon.

In Quill Corp v. North Dakota, the Supreme Court established that for states to have the authority to require an out-of-state business to collect sales tax, that business must have a physical presence within the state.  

Several states, including Indiana, Maine, Massachusetts, North Dakota, Ohio, South Dakota, Tennessee, and Wyoming, are directly challenging this standard and have passed laws that require out-of-state vendors to collect sales tax without physical presence. These states argue that if a remote vendor makes over 100 (MA) or 200 (IN, ME, ND, OH, SD, WY) separate transactions to customers in the state or sell over $100,000 (IN, ME, ND, OH, SD, WY) or $500,000 (MA, TN) annually into the state then nexus is established for sales tax purposes.

Your company may be facing new sales tax compliance or reporting requirements in five, and possibly up to 10 states where you are selling products or services, but don’t have a physical presence.  

New State Use Tax Reporting Requirements on the Books Effective July 1, 2017

Four states are introducing new use tax reporting requirements, effective July 1, 2017, for remote vendors in place of passing laws that contradict the physical presence standard.  

These reporting requirements call for out-of-state businesses to either alert their customers of their responsibility to remit use tax or to report directly to the state customer information so that the states can ensure the proper remittance of use tax.  

A brief summary of the states that have enacted new reporting requirements is listed below:

Alabama – Effective July 1, 2017: Legislation was passed that allows the Alabama Department of Revenue to now have the authority to require non-collecting vendors to notify Alabama customers of use tax obligations.

Colorado – Effective July 1, 2017: Non-collecting sellers with annual Colorado sales over $100,000 are required to report to the Colorado Department of Revenue customer information each year. Sellers must also report customers with purchases over $500 each year of their obligation to pay use tax.

Louisiana – Effective July 1, 2017: Out-of-state vendors with sales greater than $50,000 annually must inform Louisiana customers at the time of the transaction that the sale is subject to use tax. Vendors must also provide an annual statement to their customers by January 31st each year indicating the total purchases for the year. An annual report must be sent to the Louisiana Department of Revenue by March 1st in addition to the customer notification.

Oklahoma – Effective February 1, 2017: Out-of-state sellers must notify Oklahoma purchasers of their total purchases for the year by February 1st each year.  

Vermont – Effective July 1, 2017: Vendors with over $100,000 in Vermont sales in the previous calendar year must provide a notice to their Vermont customers with purchases over $500 indicating that use tax may be due. A copy must also be filed with the Vermont Department of Taxes by January 31st each year. Failure to comply could result in a $10 penalty per notice failed to be filed.

Legislation has also been introduced in Hawaii, Nebraska, Pennsylvania, Washington and Wisconsin with similar reporting requirements.

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Shopping trends and taxes

I like to look at trends because they are interesting and many have tax implications.* Trends may indicate a need to update or modernize tax rules or systems. I'm a bit behind on blogging on this, but several weeks ago, there was an article in Fortune - Phil Wahba, "Major Wall Street Firm Expects 25% of U.S. Malls to Close by 2022," 5/31/17. Reasons included bankruptcies and continuing growth in retail e-commerce sales.

I remember when the US Census Bureau first started reporting retail sales for e-commerce in the 1990s and it was less than 1%. They just updated data for 2015 and report that e-commerce retail sales represent 7.2% of total sales for 2015 (it was 6.4% in 2014). That doesn't seem like a lot to me. In contrast, the US Census Bureau reports that for 2015, e-commerce sales of merchant wholesalers represented 30.2% of total sales (it was 28.1% in 2014).

Are retail e-commerce sales going to increase to the point were 25% of US malls will close in the next five years? Seems high to me.  I expect re-purposing where, perhaps, we might do more online shopping while at the mall looking at samples of what we can buy, and getting a latte and recharging our smartphones.  That would use less retail space. Malls might add more ways for people to hang out - activities, fairs, etc.

Tax implications?  A few:

  • More online shopping can mean more uncollected use tax although I suspect a lot of the e-commerce growth will be with Amazon that collects tax in all states (at least on their direct sales).
  • If malls turn into abandoned buildings or vacant lots, property taxes will go down. Is there another need for them?  With an aging population, perhaps the space gets turned into living spaces for older folks - single level, close to public transportation and medical facilities, etc.
What do you think? Will we see 25% of malls close? What will happen to the space?
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Will Asset Protection Trusts Protect Assets From Medicaid Agencies?

There are several types of trusts that are useful asset protection tools.  Asset protection trusts include irrevocable trusts with spendthrift provisions, offshore trusts, and domestic asset protection trusts available in some states (other than Florida).   I have been asked from time to time whether an asset protection trust will protect assets from being considered in an application for Medicaid eligibility.  The question is whether one can remove their assets from Medicaid’s asset ceiling (about $2,000) by transferring their assets to a trust that does protect assets from potential judgment creditors.

Medicaid eligibility will count all assets held in a trust in which the Medicaid applicant has, or could have any beneficial interest. The definition is very broad and encompasses contingent future interests or reversion interest.  If the Medicaid agency can image the applicant getting some benefit, any amount of benefit, under any circumstances all assets in the trust will be considered to belong to the Medicaid applicant. Spendthrift trust provisions that effectively protect the beneficiary’s trust interest from civil creditors do not shield a trust from Medicaid analysis.

There are some trusts that a Medicaid applicant can create to protect his income from being taken to pay for his care in a skilled nursing home while he is receiving Medicaid benefits. These trusts will permit the applicant to fund the trust with any income over Medicaid’s income ceilings and use the trust income for the applicant’s benefit while he is getting Medicaid benefits. Any income or assets in trust at the time of the applicant’s death will be taken by the Medicaid agency to reimburse the state for the cost of care.

The provisions of these Medicaid Trusts (also called “Miller Trusts”) are substantially unlike the provisions of trusts designed for asset protection. Using any type of asset protection trust form to protect assets from Medicaid agencies may deprive the applicant of money used to maintain a comfortable standard of living in a nursing home.

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Make Sure Your Compensation Plans Are in Order and Documented

I recently finished resolving a dispute between a client and the IRS regarding the amount of compensation for the founder and owner of a corporation. While the amount of compensation during one of the years at issues was probably unjustifiably high if viewed by itself, the person's compensation over the years (and including the year in dispute) was readily justifiable when viewed over the entire period that the person worked for the business. We ended up resolving the dispute and the resolution was within $50,000 in compensation from my initial evaluation of the case. But it was an expensive "victory" for the client.

The strongest point for the IRS, and the reason it took as much time and expense to resolve, was the client’s lack of documentation of a consistently applied compensation plan. The client had annual minutes (which many clients do not), but those minutes did not address how the owner’s compensation was determined. The client also did not have a written employment agreement, nor did they have any written (or “understood”) basis for calculating the client’s incentive compensation each year. This lack of a consciously determined pattern to the compensation ended up costing the client several thousand dollars in attorneys fees, and a like amount in additional taxes.

The moral of the story: properly pay and report compensation to employee/owners as such; have a written employment agreement or at least some sort of documentation in your minutes of the oral arrangements for compensation; make sure you have a documented or easily proved method for determining incentive compensation that is reasonable in amount.

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Non-Resident Capital Gains Tax Penalties

Since April 2017, non-UK residents selling a UK residential property have been required to report the disposal to HMRC within 30 days of completion and pay capital gains tax on this as appropriate, or run the risk of incurring substantial penalties. These new rules are usually referred to as Non-Resident Capital Gains Tax and this blog looks at penalties which are imposed by HMRC for non-compliance.

See our full article on Non-Resident Capital Gains Tax here.

What are the consequences if you miss this deadline?

It will come as no surprise to learn that HMRC will penalize you if the return is not filed on time, with the level of penalties raised dependent upon how late the return is.

• An initial penalty of £100 in all cases;
• daily penalties of £10 for returns filed between 3 and 6 months late, subject to a maximum of £900 (but these are discretionary, see below!);
• a further penalty of 5% of the tax due, or £300 if greater, for returns filed more than 6 months late;
• a further penalty of 5% of the tax due, or £300 if greater, for returns filed more than 12 months late.

That’s a total of up to £1,600 (or £3,200 if the property was sold in joint names) for missing a filing deadline many people are unaware of.

Can the penalties be cancelled?

In spite of the penalties being disproportionate to any tax which may or may not be due, HMRC’s stance is unforgiving and will not entertain an appeal unless there is, what they consider to be, a reasonable excuse for failing to file on time.

A crumb of comfort?

However, we have recently seen a breakthrough in a number of our client cases and HMRC have accepted that daily penalties will not be applied, these have been removed and it is understood that HMRC will no longer issue daily penalties. The remaining late filing penalties will still be charged, but this mitigates the potential costs significantly.

Whilst this is positive, it does still leave a bitter taste in the mouth for clients who, quite understandably, were unaware of the filing requirement and were not advised of this by the solicitor dealing with the conveyancing work.

If you are a non-resident selling UK residential property we recommend you file on time if you have failed to file your non-resident CGT return or have filed late and been penalized with daily penalties you also need to take action now and should contact us for further assistance.

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3 Ways to Get a Fresh Start with the IRS

Who couldn’t use a fresh start—especially when it comes to alleviating tax debt? If getting rid of debt were as easy as closing our eyes and snapping our fingers, we’d never learn the meaning of discipline. No, if getting rid of debt was that easy, then the Internal Revenue Service (IRS) wouldn’t even be necessary. But debt is a real thing that plagues most American taxpayers and while many may have it under control, there are millions who don’t. That uncontrollable debt can spill over to having issues with federal debt—something you might want to avoid altogether if at all possible.

Yet, many don’t.

The IRS’ Main Job

And aside from collecting tax debt, the IRS is very necessary for ensuring that the taxes collected are fully accounted for so that lawmakers and congressmen can disperse them to the proper legislative channels. In order for them to do this, they need to have an accurate budget of the numbers. This is projected by the number of American taxpaying citizens and their household income. The level of their income will determine exactly how much they owe in taxes.

So if those taxpayers who owe don’t file or pay the amount that the IRS claims they owe, this puts the US Treasury in a compromising situation. Take, for example, your paycheck. If you’re expecting a certain amount of money to be directly deposited into your bank account, then chances are you may have already planned to spend that money on paying bills, groceries, etc. If you don’t receive that check, then you’re put in a compromising position. With the US Treasury, they’re in a compromising position that could be well into trillions of dollars!

Success Tax Relief does not want you to be in a financially compromising predicament. If there’s a way we can help you get a fresh start, then we want to provide you with 3 simple steps in helping to clear your tax debt once and for all.

  1. Monthly Payments

Even if you owe the IRS thousands of dollars, they will work out a monthly payment plan that won’t leave you in hardship. All you need to do is communicate your intention to pay.

  1. Avoid Tax Liens a Little Better

There’s really nothing that you need to do to make this work for you except avoid your tax debt from increasing. To do this, just avoid any missed or late payments because late payments equal penalty fees, and penalty fees and missed payments mean you’ve forfeited the payment agreement, and you’re right back to where you started—in debt and/or in trouble!

  1. File for an Offer in Compromise

It’s quite possible that you might be eligible for an Offer in Compromise that allows you to pay less than you owe. This isn’t an option that everyone is qualified for. Each case is different.

To determine if you qualify for an Offer in Compromise or if you need assistance working out a monthly payment plan to the IRS, then contact veridianfinance Tax Relief for a free consultation. 

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